Conceptual Framework

Financial Accounting Definition

  • Accounting is the process of identifying, measuring, and communicating information to support judgements and decisions (American Accounting Association).

Users of Financial and Accounting Information

  • Key users: shareholders/investors, managers/directors, suppliers, lenders, investment analysts, government, general public, competitors, customers, employees.

User Information Needs

  • Investors, lenders, suppliers/creditors, employees, customers, government, and public have different information requirements.

Types of Business Entities

  • Profit-making: companies (public limited, private limited), sole traders, partnerships.

  • Not-for-profit: charities, voluntary organisations, quangos, etc.

Focus on Profit-Seeking Entities

  • Sole proprietorship: owned by one individual, unlimited liability, limited capital access.

  • Partnership: two or more owners, shared risks, limited capital access.

  • Company: distinct legal identity, limited liability, easier capital access, public vs. private distinctions.

Reporting Entities and Financial Statements

  • Types of shares: ordinary/preference.

  • Common financial statements include: Income Statement, Balance Sheet, Cash Flow Statement, Changes in Equity.

  • Companies must undergo audits and appropriately disclose financial information.

Qualitative Characteristics of Accounting Information

  • Relevant, reliable, comparable, understandable.

  • Important practical criteria: materiality and cost vs. benefits.

Types of Accounting

  1. Financial Accounting: Provides information about financial position and performance for decision making.

  2. Management Accounting: Relevant information for business strategy, planning, controlling activities, and resource usage.

Financial Reporting Process

  1. Business transactions occur.

  2. Bookkeeping (journals, T-accounts, ledgers).

  3. Trial Balance & Adjustments.

  4. Financial Statements prepared (P&L, BS, CFS).

  5. Audited FS approved and distributed.

Accounting Regulation Framework

  • IASB, ASB, IFRS, UK GAAP.

  • Regulatory system defines principles/practices for financial reporting and varies by country.

Companies Act Requirements

  • Maintain adequate accounting records.

  • Prepare annual accounts to provide a true and fair view.

  • Audit requirements in accordance with Companies Act 2006.

Benefits of Accounting Harmonisation

  • Easier access to foreign capital, increased credibility, lowered cost of capital, comparability, transparency.

Key Accounting Concepts

  1. Going concern: Assumes ongoing business operation.

  2. Consistency: Application of principles remains uniform across periods.

  3. Accrual: Recognizes income/expenses when earned/incurred.

  4. Prudence: Anticipates losses, does not anticipate profits.

Additional Conventions

  • Business entity: Separate identities of business and owners.

  • Money measurement: Only monetary items are recorded.

  • Historical cost: Original acquisition costs are recorded.

  • Periodicity: Accounts prepared for set periods.